Junior ISAs: what are the options at age 18?

If you’ve got a child that’s coming up to 18 – or just reached that massive milestone – you’ll no doubt have had some pretty heavy discussions about their future. But while what they will do once they finish school or college is likely to be your biggest priority, it’s also a good idea to start talking money and, specifically, what they want to do with their Junior individual savings account (JISA).

From their 18th birthday, your teenager’s JISA will convert into an adult ISA, and they will have full access to their cash. But while you can’t (legally) stop them blowing it on the best end of A-levels holiday ever, you can sit them down and discuss their options.

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The right option for them will, of course, depend on the size of their pot, but they should also be encouraged to think about their broader financial circumstances, what the next few years are likely to have in store as well as their longer-term goals.

Here we look at their options, depending on their plans for their nest egg.

‘Help! Turning 18 is expensive – I need the cash’

Whether it’s buying and insuring their first car, funding a gap year or helping with the costs of going to university, embracing the freedom that comes with adulthood doesn’t come cheap.

If they’ve got a stocks and shares ISA and need to access their money either now, or at some point in the near future, it’s worth thinking about transferring the funds they will likely need into a cash ISA. This will lock in the value of their nest egg and prevent a stock market wobble wiping out any of their gains.

An instant-access cash ISA will let them dip into their account whenever they need their money, while still sheltering it from tax. If they’ve still got a year or two before they will likely need their money, they might want to consider a fixed-rate ISA. This will mean that the rate they earn on their pot won’t fall when interest rates do; however, they won’t be able to access their money until the fix finishes – unless they are prepared to pay a penalty charge.

‘I want to start saving for a home of my own’

If they want to start saving for a home of their own, there’s a lot to be said for leaving money that’s invested in a stocks and shares JISA where it is. Even if there are no further contributions, over a five-to-10-year time frame they should still get to enjoy further investment growth and cash in on the wonder of compounded returns.

But there is another option. Each year they could transfer money from their cash or stocks and shares ISA into a Lifetime ISA and get a top-up from the government.

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Lifetime ISAs are available to all UK residents aged between 18 and 39. Each year you can invest up to £4,000 (part of your new £20,000 annual ISA allowance) and get a 25% bonus worth up to £1,000 from the government. You can choose a cash or stocks and shares Lifetime ISA; the catch is that you can only make a withdrawal to buy your first home, to spend in later life (after the age of 60), or if you are terminally ill. If they make a withdrawal for any other reason they will have to pay a 25% withdrawal charge – equivalent to their government bonuses.

That means, it only makes sense to choose a Lifetime ISA if they are fully committed to using that money to buy their first home. If they want to maintain some flexibility, it may make more sense to just stick with a stocks and shares ISA.

Of course – if the size of their pot permits - they can spread their money between a Lifetime ISA and a stocks and shares ISA.

‘I want to grow my pot even more’

A JISA provides a fantastic opportunity for parents and grandparents to engage young people and start teaching them about saving and investing. And, after potentially 18 years of contributions, they provide a fantastic advert for the benefits of squirrelling money away over the years.

Although stocks and shares JISAs provide better potential for investment growth, most parents do plump for cash. So, if your child has a cash ISA and wants to boost the value of their nest egg, they could consider transferring their pot into a stocks and shares ISA.

It’s just important to ensure they know that while they can access their money whenever they wish, if they are likely to need the money in the next few years, it would be best to stick with cash.

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You may also want to take the opportunity to help them with their investment choices, especially the adrenalin junkies among them. Collective investments such as funds and exchange-traded funds (ETF) might not be considered as exciting as individual shares in the businesses they’re interested in, but they will be lower risk, especially for those who don’t have the appetite to spend time researching stocks or monitoring their portfolio.

‘Call me strange, but I want to start saving for retirement’

Your child might garner some strange looks when they suggest they want to blow their Junior ISA on their retirement. But, if your 18-year-old is committed to “adulting”, investing some or all their Junior ISA into a retirement pot could be one of the wisest investment decisions they ever make.

Non-taxpayers can pay in up to £2,880 each year into a personal pension like a SIPP, boosted to £3,600 by basic-rate tax relief on the contribution. Do that just once and they’ll be giving their retirement saving an enviable head start. After 50 years (when they turn 68), that single £3,600 contribution could be worth as much as £41,283 (assumes 5% annual return, excluding charges).

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Or they could consider paying up to £4,000 a year into a Lifetime ISA, which would give them the option to keep their money for retirement, or put it towards their first home, if they change their mind.

What if my child has a Child Trust Fund?

Child Trust Funds (CTF) were the predecessor of the Junior ISA, with the parents of children born between 2002 and 2011 given a voucher worth £250 to open a tax-free savings or investment account for their child and get saving on their behalf. Like ISAs, the money can only be accessed when the child turns 18.

If your child still has one of these accounts, it won’t automatically convert into an adult ISA when it matures on their 18th birthday. However, if they don’t need to cash it in to spend in the near future, they can still transfer the money into an ISA without losing any of the tax benefits.

Alternatively, if your child has got a CTF and isn’t yet 18, you can still transfer it into a cash or stocks and shares JISA if you wish. That way, it will automatically convert into an adult ISA when they turn 18.

As CTFs are also no longer available, you will also likely find that by transferring it into a Junior ISA now, they will be able to benefit from either higher interest rates or a wider choice of investment options and, quite possibly, reduced charges.